Boards and Public Displays of Disaffection

photo (4)By Vernetta Walker, vice president of programs and chief governance officer, BoardSource

A few weeks ago, there was a news story indicating that the entire 20-member board of the Minnesota Dance Theatre had stepped down en masse. In three paragraphs, we learned that the theatre is solvent and successful, and that the outgoing board says it hopes the theatre will continue to succeed. We also heard that the group is led by the daughter of the founder; we are then left to color the picture in as we will.

The adage “actions speak louder than words” seems to apply here. Who could read this and not wonder what fight was going on in that boardroom that required such dramatic action? Perhaps it’s best that we don’t know the details or drama, but it would be shortsighted to think no damage has been done. The stakeholders of nonprofits tend to believe that they have a right to know why the stewards of an organization they love or do business with would just desert the ship.

Internal strife comes in many forms. As a consultant for a national organization that focuses on strengthening nonprofit governance, some of the more fundamental breakdowns I see occur when there is a lack of a shared vision among the board and chief executive, an inability to form a constructive partnership, or a disagreement over strategic direction and how to proceed. Most boards and staff are committed enough to work through these issues, so when more drastic measures are taken — like this situation, or the one in which a CEO tried to “fire” his entire board, or where another board resigned in the wake of a criminal investigation —  organization’s reputation suffers, as do individual players.

Boards can never underestimate the impact of their actions on an organization’s image and reputation. Most nonprofit organizations depend on positive relationships outside the organization for resource development and the distinct competitive advantage that comes with having a positive public persona. As guardians of organizational mission and resources, the board must understand that those partners begin to get nervous when they see public displays of disaffection.

Bad news travels and spreads at the speed of light, maybe even faster in the age of the Internet, and there’s no opportunity to unring the bell. Recovery can be slow and painful. Just think about Susan G. Komen’s Race for the Cure and their continued struggle to bring in fundraising dollars at the level they enjoyed prior to what many claimed was a politically motivated decision to defund Planned Parenthood in 2012.

The lesson as I see it is for every board to consider how its behavior will impact the reputation of the nonprofit among its various constituencies. It is important to ask, “How is this action taken or message sent likely to play among our stakeholders?” Whether fairly or unfairly, the public and an organization’s stakeholders often make judgments about an organization based on what they know about the people who serve on the board. What people see and hear can influence what they will give or the decision to support an organization moving forward.

The post also appeared in The Nonprofit Quarterly.

Ten Things Boards Do Right (Without Even Realizing It)

photo (4)By Jan Masaoka, publisher, Blue Avocado; CEO, California Association of Nonprofits

No matter what goes wrong in a nonprofit, somehow the board gets blamed. If the executive director embezzled money, people say, “Where was the board?” Why don’t they say: “Executives are always at the root of the problem. Why don’t we just stop having them?” In fact, boards and board members don’t get credit for some important work they do without even realizing they are doing it. Think about it:

1. Safety net

The confident trapeze artist doesn’t really see the point of the expensive safety net. Few people appreciate safety nets — or boards — when things are going fine. But when a nonprofit’s staff leadership falls off the tightrope, nonprofit boards step up, govern, fix things, and hire a new, better executive.

Think of a nonprofit scandal such as the executive of a halfway house molesting residents, or the executive of a disaster relief nonprofit embezzling money. In virtually all of these cases, the board — whether previously asleep or lied to — stepped in and saved things.

In a for-profit small business, such a problem would simply bring the company down. But nonprofit boards know that communities and people are hurt when nonprofits fail. Those silent, unappreciated safety nets do their jobs when called upon.

2. Speed limits patrolled by aircraft

When people drive down an empty country highway and see this sign, they slow down, even if there don’t seem to be any planes overhead. Even executives who speak contemptuously about their boards end up being more careful because the board is there. When a board member reviews the CEO’s expense report, the CEO is more likely to keep those expenses reasonable, even if that board member signs the report without really looking at it.

And having to report to the board — such as through a quarterly written report — acts to help an executive reflect on past activities and re-focus on priorities.

3. Putting their own bank accounts at risk for staff wrongdoing

By being on the board, board members expose themselves to liabilities that D&O insurance doesn’t cover. (D&O by law can’t insure board members against tax failings or criminal acts. If it could, we would all get D&O insurance, and then fail to remit payroll taxes.)

When staff don’t submit the payroll taxes withheld from employee paychecks or the employer-paid payroll taxes, board members can be individually liable. We’ve seen board members of a small nonprofit alternative college have to chip in thousands of dollars because the staff was “borrowing” from the payroll taxes. We’ve seen board members have liens put on their houses.

By taking these actions, board members are not only helping the organization. They are helping the community served.

4. Baton relay

Boards take the organization back when the executive leaves, find a new executive, and then turn the organization over to that new leader. This is one way to understand executive director departure, and the board’s role in this transition.

5. SWAT team in waiting

It’s rare for executive directors to cry “help!” in despair to their boards. We executives like to tell the board about a problem just seconds before telling the board about the solution we have devised. (And then, of course, the exec wonders why the board always expects them to be able to pull yet another rabbit out of the hat).

But when an exec is really at a loss over a problem and asks in despair for help, board members leap in. A lawsuit? Board members identify lawyers to help pro bono. Someone has to drive the musicians to the concert at the prison tonight and there’s no one else to do it? A board member will cancel plans and volunteer. Being evicted with two weeks’ notice? Board members will pressure the landlord, call lawyers, try to get the city to stop the eviction. Is your nonprofit homeless shelter being blamed unfairly — something like where a man stayed at the shelter and three weeks later killed someone? Board members will stick up for the organization.

Executives seldom ask board members for help on urgent, crucial, big things. When we do, we usually get the help we need. To quote the Rolling Stones: “You can’t always get what you want. But if you try sometimes, you just might find, you get what you need.”

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In Defense of Mission

By Anne Walhandslestad, president & CEO

Last week, the folks behind the “America’s Worst Charities” article, which triggered a widespread discussion about the fundraising practices of nonprofits, launched a new resource called “Charity Checker.” Designed to help donors access aggregated data about nonprofit financials, performance, and commitment to transparency, one can understand the appeal of this new resource. It’s easy, straightforward, and helps donors evaluate whether an organization is worthy of their hard-earned dollars.

Many would argue that a resource like this is desperately needed, given some of the scandals that have rocked the charitable sector, not the least of which is the recent exposé done by The Washington Post about the number of organizations that have fallen victim to fraud and theft. I don’t necessarily disagree with the value of this type of donor-focused resource (though I think that between Guidestar, CharityNavigator, and BBB Wise Giving, we are pretty well covered), but would argue that we need to do more to ensure donors do not miss the big picture about what the charitable sector was created to do.

Oftentimes, when a charity experiences a scandal, the public outcry is “How dare they abuse donors’ funds that way?” While perfectly understandable, I believe this is a misguided outrage. Don’t get me wrong, I firmly believe that organizations have not only an ethical responsibility — but also a legal duty — to be honest and forthright in their interactions with donors. We owe those who invest their hard-earned dollars in our missions honesty, integrity, and clarity; without it, the charitable sector will not deserve or receive the support that it needs to fuel its important work.  But the greater tragedy and offense when nonprofits abuse the resources entrusted to them is against their own missions, and the people and communities they serve.

Why is this such an important distinction? From a societal perspective, we are miseducating donors about what makes an effective organization (hint: it’s not all about avoiding scandals and having low overhead) and — more broadly — we are mischaracterizing the purpose of the charitable sector.

If we’re going to rally resources to help donors better evaluate organizations, let’s focus on their strategies and impact, not just their accounting practices. And if we’re going to take to the streets to defend those who have been wronged when nonprofits falter, let’s focus on the communities and individuals who need the support, strength, and integrity of the nonprofit sector, not those who fund it.

This post also appeared in The Huffington Post.

Don’t Wait to Be Asked

walkBy Anne Wallestad, president & CEO

In the world of fundraising, there’s a mantra, “If you don’t ask, you don’t get.”  And it’s true.  Organizations that wait for donors to come to them don’t typically do so well when it comes to fundraising.  And fundraisers – whether board or staff members – learn early on that leaving fundraising to chance is a recipe for disaster and disappointment.

The same could be said for board recruitment:  Waiting for potential board members to find you is not a winning scenario.  From a practical standpoint, you’re unlikely to have enough potential board members find you to effectively populate your board.  And from a strategic standpoint, you’re even less likely to find the blend of skill sets, community connections, and interpersonal dynamics that characterize the most effective boards.

But the importance of proactivity and thoughtful selection of board service opportunities goes both ways.  Individuals who are considering joining a board are wise to think about what they’re looking for in a board service opportunity.  And, once they know what that is, I would argue that it’s not smart to wait for it to come to you.

Why?  Because the most effective board members are individuals who are truly passionate about what an organization does; are willing to commit time, resources, and energy to strengthen and sustain it; and embrace board service as a serious commitment.  Self-identifying your commitment to an organization is a powerful first step in the right direction.

There is power in knowing what you want and going after it.  Here are good things to keep in mind when you do:

  • Consider working through a partner:  There are lots of organizations that help to identify and source board members for nonprofits in a specific community or mission area.  They’re a great place to start when looking for a board service opportunity.
  • Do your homework:  Learn about the organization’s programs and what its key strategies are for the future.  Read up on who’s currently serving on its board to get a sense of what the organization looks for in terms of its board profile and whether you could bring a new perspective or skill set.
  • Go with your gut:  You may find — once you get to know the organization a bit — that something feels “off” and that the thought of joining its board is making you uneasy.  Don’t ignore that feeling.  It’s much easier to avoid a bad board situation than to get out of one.  Check out Rick Moyers’s post Want to Avoid a Bad Board Experience?  Consider Saying No for some specific things to watch out for when considering a board.
  • Take no for an answer:  Just because a specific board service opportunity seems like the right fit for you doesn’t mean it will be the right fit for the organization.  It’s critical that organizations and individuals are honest about what they both are looking for and need.  If this particular organization isn’t looking for someone with your experience and background, that’s ok.  Move on and look for an organization that is.  For more on that topic, check out my previous post on What Online Dating Can Teach You About Boards.

Do you have a good story about going after a board service opportunity?  We’d love to hear about it.

Meet Our New Board Member of the Month

photo (4)By BoardSource

BoardSource and Points of Light are pleased to announce that Sheff Crowder is the newest Board Member of the Month. BoardSource and Points of Light created the Board Member of the Month Award to honor outstanding individuals for their commitment to advancing the public good through exceptional nonprofit board leadership.

Sheff serves as the founder and a volunteer board member of the Nonprofit Leadership Center of Tampa Bay, FL. He is president of the Conn Memorial Foundation.

In nominating Sheff for the Board Member of the Month Award, Grace Armstrong, executive director of the Nonprofit Leadership Center, noted the following:

“In his role as a funder in the Tampa Bay community, Sheff saw the need for education of area nonprofits so that they could have the skills to achieve their missions effectively and efficiently. And in 1996, he brought together a coalition of community funders to create the Leadership Center, which teaches nonprofits the skills to run their businesses.

“Since that time, Sheff has served the Center as board chair, board treasurer, and as a board member while observing appropriate best practices in term limits. He has not lost his passion for or involvement with the organization. He develops other board members into leaders, elicits generative thinking from both the board and the staff, and is always willing to take a back seat when others have stepped up to provide leadership. Sheff uses his sphere of influence to bring resources to the table and is not afraid to make an ask on behalf of the Center. He is a volunteer instructor in our finance series, actively participates on committees, and is a thoughtful sounding board for me, as he loves to engage in analytical thinking. Among the initiatives he has helped develop is a partnership with the University of Tampa that resulted in a graduate-level Certificate in Nonprofit Management, a Leadership Conference now in its third year, and a Fund Development Academy within the Center. As a board leader, he maintains the perfect balance of involvement, engagement, and listening/observing.

“Sheff’s commitment to the Center has spanned 16 years. He created a resource that has changed the nonprofit landscape in the Tampa Bay area and is untiring in his belief that the best way to positively impact the nonprofit sector and subsequently change the world is through education.”

Recently, BoardSource asked Sheff a few questions about his board service:

What inspires you to serve on this board? I am the president of the local foundation, hired in 1993. The chair who hired me was a long-time community leader and wanted me to build the nonprofit structure.  Three years later, in 1996, I founded the Leadership Center, and my focus has been there ever since.  We have found that many nonprofit leaders come from the program side and are thrust into having to run the business side without the skills and knowledge needed.  We therefore mentor in the business aspects of running a nonprofit. One of the programs allows you to get a M.B.A. and a certificate in nonprofit management from the local college.

What does leadership mean to you? Having good strategy, fiscal oversight, and the right people on and off the bus. Sometimes hard decisions have to be made. You have to stay focused on what is right for the agency, and stop trying to please everyone.

What do you consider the most important quality in a nonprofit board to attract good board members? Strategic thinking at the board level is a quality that good board members will be attracted to.

What do you consider the most important quality in a nonprofit board member? The Leadership Center looks for board members who are passionate about our mission, bring a special skill set, are able to raise money, or have program expertise — all of these add value to the agency.

What do you think is the most important thing you have contributed to this board? Recognizing that there was a need for a regional asset and taking the steps to put it in place and grow it over the years.

What advice would you give to aspiring board members on how to make a difference? Find a mission that you are passionate about and make sure you fit the board’s culture and feel good about the organization’s leadership. Then, figure out how you can best contribute to the board and organization.  Providing strong fiscal oversight, developing strategy, and monitoring it makes a difference.

What does this award mean to you? I am honored to be recognized by two national organizations — BoardSource and Points of Light — that I think highly of. Both the current and past chief executives of the Center have gone through BoardSource trainings and our current CEO is a BoardSource certified governance trainer. Boardsource has been our go-to resource.

Interested in recognizing an outstanding board member for his or her contribution to your organization? Nominate him or her here.


Is Nonprofit Board Service Worth It? Reflections from a One-Time Skeptic

phil_blogBy Phillip Henderson, vice chair, BoardSource Board of Directors; president, Surdna Foundation

When I took the job as president of the Surdna Foundation in 2007, I was not surprised to be showered with flattery and pursued by people who hoped I might just write a check to support their work. What I hadn’t fully anticipated were the many requests to serve on nonprofit boards.

Early in my career, I have to admit, I was a bit of skeptic about boards, thinking they were really just window dressing. Wasn’t a board member’s job simply lending his or her name to the organization’s letterhead, attending quarterly meetings, and offering the occasional nugget of wisdom?  In other words:  Don’t board members just show up and smile? It would be difficult to convince a skeptic otherwise, for we’ve all heard the not-so-apocryphal-sounding stories of big corporate boards that were asleep at the wheel while their CEOs did nefarious deeds. 

Some of my doubt about board service stemmed from the utter failure of boards at companies like Enron and WorldCom. While these catastrophes did lead to legislation aimed at creating greater accountability at both corporate and nonprofit boards, the primary effect of that law, known as Sarbanes-Oxley, seems to have been an increase in paperwork and formal checklists, not to mention fees paid to lawyers and accountants.  It’s difficult to say how effective it has been. Board members do, however, pay far more attention to the tax returns and the work of audit committees.

So I harbored these doubts, but it was not until my first personal experience on a board that I awoke to the reality of the seriousness and responsibility of being a board member.

In 2003, while at the German Marshall Fund, I joined the board of the Trust for Civil Society in Central and Eastern Europe, which included representatives from the funders who created the Trust — the Ford, Mott, and Open Society foundations, German Marshall Fund, and Rockefeller Brothers Fund.  Soon after I joined, the board realized that the very future of the Trust required completely retooling the business model and transitioning to new leadership. It was the board, which I chaired, that was expected to roll up its sleeves and get this done. The work was serious and time-consuming, and the challenges could not have been bigger. And nowhere in sight was the ceremonial, make-wise-comments board experience I had anticipated.

I’ve since found that my Trust experience was not an anomaly. Board service is serious and demanding business, a reality that is often obscured by the fact that most nonprofit board members are “volunteers.” And, in many cases, board members are also donors — often significant ones. The checks they’re writing, in addition to the many hours they’re giving, only add to their sense of ownership and commitment to the organization’s success.

Since coming to Surdna six years ago, the invitations to join boards have been frequent.  I am now serving on three boards — Living Cities, Romanian-American Foundation (RAF), and BoardSource — plus acting as an advisor to Bard College’s Center for Civic Engagement.  I take board service seriously, and because I have learned it is time-intensive and demands year-round attention, I think I’ve got a pretty full dance card.

But why serve on nonprofit boards at all?  I have several motivations for my own board service, some of which can be broadly applied to all who are interested in social change:

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Meet Our New Board Member of the Month

September Winner Headshot - rachel kiddell-monroeBy BoardSource

BoardSource and Points of Light are pleased to announce that Rachel Kiddell-Monroe is the newest Board Member of the Month. BoardSource and Points of Light created the Board Member of the Month Award to honor outstanding individuals for their commitment to advancing the public good through exceptional nonprofit board leadership.

Rachel serves as the board president of Universities Allied for Essential Medicines (UAEM), located in Oakland, California. She is a lawyer who resides in Montreal, Quebec.

In nominating Rachel for the Board Member of the Month Award, Jane Andrews, leader of UAEM’s human resources committee, noted the following:

“Rachel, a lawyer residing in Canada, has been an impressive force of leadership as board president of UAEM. Our board consists of recent graduate school alumni, many young physicians and lawyers, who are united by our commitment to creating public access to publicly funded research. Only an individual as renowned, experienced, and inspiring as Rachel would have the guts and the skillset to unite us and guide us through the highs and lows of a start-up nonprofit. Most board members had no prior board experience. Rachel taught each of us what our roles and responsibilities should be and how to complete the necessary business to keep this organization running financially, ethically, and in a mission-oriented way.

“Rachel has guided our organization to establish useful committees, has led us through annual goal-setting, has led critical inventions and reinventions of our five-year organizational strategy, has shepherded our board through times of financial crisis, has singlehandedly raised more funds through her winning personality and top-notch Rolodex than any other board member, and more recently, has led discussions about the importance of adjusting our duties as our board matures. Her sensitivity to personnel issues is unparalleled and has led to true camaraderie among board members as well as with our last two executive directors, both of who received guidance from her frequently as they started their employment.

“With her leadership, our board has developed over the past seven years from a group of individuals whose membership was quite young and who presided over tenuous organizational finances into one that has recruited financial experts, hired highly qualified staff who took over most of the administrative duties, and one with a diverse group of regular donors as well as a large, committed, and international membership base.”

Recently, BoardSource asked Rachel a few questions about her board service:

What inspires you to serve on this board?  There are two parts.  First, our mission of ensuring affordable access to medicines resulting from publically funded medical research carried out on our university campuses. Having worked in in Southeast Asia, Africa, and Latin America with people who died because they could not afford the treatment, this is an issue I am passionate about. Second, the student members. We need new global health leaders and these UAEM members are already showing leadership in global health. They are incredibly committed and bright — it is such a privilege to work with them.  I enjoy helping them present themselves and organize themselves so that they gain more skills and experience, as well as share their knowledge and insights. I wanted UAEM to provide an environment where students are empowered to both act now and gain experience of nonprofit leadership. Part of this is giving them a chance to learn the roles and responsibilities of being a board member firsthand.

 What does leadership mean to you?  Leadership is about being committed to a principle and idea, and then showing people how to make it a reality.  It’s about guiding others and showing them that change can be made. To lead you need to believe in what you are doing, inspire others to believe in it too, and then to be able to organize so that the message is heard.   I believe in being approachable as a leader.   I find this important.  A leader for me is someone people can look up to and get mentorship from.  I also act according to the principles I promote inside UAEM.  What I say is what I do.  I walk the talk, and I strive to be an example for others.

What do you think is the most important quality a nonprofit board should have?  Be driven by an inspiring and concise vision and mission, with clear objectives.  One of the first things I did when I began with UAEM in 2007 was make sure we developed a vision and mission that were owned by all and clear for all. Now, when people are interested in UAEM, they get an immediate feel for what the organization is about and how it aims to reach its goals.  I think a nonprofit board should strive to grow according to the needs of the organization to achieve its objectives and use money entrusted for those goals responsibly and effectively.  I also think it is important to have a strong feeling of collaboration and mutual responsibility among the different board members. A respectful and open atmosphere is essential. While we meet every month on a teleconference, our board only meets twice a year in person.  When we meet we make an effort to make it fun and stimulating and always include a social activity at the end.  One of my favorites is our karaoke night. We laugh a lot and it creates a real sense of bonding.

What is the most important quality for a board member to have?  Aside from being passionate about the issue, a board member needs to be able to listen to others and take into account their views; to be open minded; to be able to communicate and argue a position. If you feel strongly about something, you should ensure you can articulate it and stand by that position. Communication is a critical quality.

What do you consider your most important contribution to UAEM? I am committed to modeling good leadership and empowering young, new leaders. When you are a student, you tend to be treated paternalistically. What I have said is that when we are here together working on access to medicines, we are all equals and as such, we respect each other and recognize each other’s skills and abilities, and use them! I have been on this board for six to seven years and have had no major human resource issues. We have worked hard to promote harmony and openness throughout. I’ve also tried to challenge the classic top-down hierarchy and bring in a flatter structure that puts students and their vision at the center of everything we do.  The board has fiscal and fiduciary responsibilities for the organization but it should not be a distant body.  It needs to be a part of the jigsaw of organizational parts that create the whole.

I came to the organization when it was a network of a few dozen students in the U.S. with no fixed executive director and no secure funding.  We now have more than 120 chapters across the U.S., Canada, Brazil, and Europe and new chapters beginning in Nepal, Bangladesh, Singapore, and India.  We have a steady annual budget, a fabulous executive director, and hundreds of students working on critical access to medicines issues on their university campuses.

What does this award mean to you? I feel appreciated and honored. I’m happy to know that our board members are enjoying the organization they are so key in creating. I’m pleased that I can provide leadership for the next generation of leaders.  Of course, it’s also nice to know that I have done something right somewhere!  I hope to carry on supporting UAEM in its international expansion while I also continue with my responsibilities on the international board of Médicins Sans Frontières/Doctors Without Borders (MSF).


Social Enterprises: Nonprofit vs. For-Profit

photo (4)By Erin Bradrick, senior counsel, NEO Law Group

The twelfth in our series of blog posts written by BLF 2013 speakers, presenters, and sponsors.

The movement towards social enterprises that we’ve seen in the last decade is beginning to reshape both the nonprofit and for-profit sectors — with many nonprofit charitable organizations looking more and more like for-profit entities and vice versa, the rise of joint ventures between nonprofits and for-profits, and increasing numbers of for-profit entities creating and controlling affiliated charities.  Nonprofit boards of directors are moving their organizations towards social enterprise structures in an effort to increase revenues as they face simultaneous challenges of diminishing governmental funding, uncertain philanthropic funding, and increased competition for limited resources.  For-profit entities are similarly operating in an increasingly competitive market and are seeking to differentiate themselves and generate goodwill by self-identifying as social enterprises, sustainable businesses, and/or certified B corporations.  And social entrepreneurs are moving towards sector agnosticism as opposed to limiting pursuit of their charitable goals to traditional nonprofit structures.

As the differences in the activities of nonprofit and for-profit organizations continue to blur with the increasing commercialization of charities and the growth of socially purposed taxable entities, the nonprofit sector will see stronger pushback from regulators and critics.  The IRS will place greater scrutiny on unrelated business taxable income; nonprofits will respond with increased use of taxable subsidiaries; and critics of the “hybrid” entities will become increasingly vocal, warning legislators of the risks of charity-washing and encouraging attorney general oversight.  As a result of this shifting regulatory environment, boards of nonprofit organizations seeking to launch social enterprise ventures must ensure thorough compliance with the applicable laws and regulations and should give careful consideration to the legal structure best suited to the goals and needs of the organization.

Before kicking off a social enterprise venture, the initial threshold questions a nonprofit organization’s leaders should ask are whether the idea is viable and whether the organization has the capacity to make the venture successful.  In evaluating its capacity, the organization should look not only at its financial resources, but also its human, systems, technology, time, administrative, and space resources, and should consider what resources in each of these categories it currently has available, what resources it will need in order to successfully operate the social enterprise venture, and what modifications to its operations it may need to make in order to adjust its available capacity.  The nonprofit should also conduct significant research regarding the relevant market, as well as develop a thoughtful business plan and financial projections.  The organization’s board of directors will also want to take certain steps to ensure that each director has satisfied her or his duties to the organization, including by conducting a reasonable investigation of the contemplated venture, identifying and managing potential conflicts of interest that may arise, and ensuring ongoing legal compliance.

Once an organization’s board has decided to pursue a social enterprise venture, it must determine whether to conduct such activities in-house or through a separate entity.  If the business is related to the organization’s exempt purpose (which is often a complex determination requiring legal advice), or will constitute a small part of its overall activities, it may be easiest to keep it in-house.  However, if the earned income is generated by a trade or business that is regularly carried on and not substantially related to the organization’s exempt purpose, it may generate unrelated business taxable income subject to the unrelated business income tax (UBIT).  Moreover, and more fundamentally, under the commerciality doctrine, an exempt organization cannot engage in more than an insubstantial amount (which is not clearly defined) of unrelated business activity without risking the loss of its 501(c)(3) tax-exempt status.  If the board is concerned about the possibility that the venture’s activities are unrelated and substantial, structuring the social enterprise in a subsidiary or affiliate organization may be an attractive option and may also provide the existing organization with greater protection from a venture with a higher risk profile and better preservation of the existing organizational culture of the nonprofit.

If, after reasonable investigation, the board determines it is in the organization’s best interest to create a for-profit subsidiary, it again has multiple options as to the legal structure of the entity.  It may choose from among traditional business forms like a corporation or a limited liability company (LLC), which offers fewer formalities than a corporation, but is typically set up as a pass-through tax entity and therefore may not be an appropriate vehicle in which to house a substantial unrelated income-generating business.  Either a corporation or an LLC may also seek to become a Certified B Corporation — a certification provided by the nonprofit B Lab to entities meeting certain social and environmental criteria.

Alternatively, the subsidiary may be structured in one of the newer “hybrid” forms, which currently include the low-profit limited liability company (L3C), the benefit corporation, the flexible purpose corporation, and the social purpose corporation.  The L3C is a form of LLC, but is governed by statutory limitations that are harmonized with the program-related investments (PRIs) regulations and therefore may be more attractive to some private foundation funders, though that has yet to be evidenced on a widespread scale.  Nineteen states and the District of Columbia currently permit corporate entities to be formed as benefit corporations, which must pursue the general public benefit in their corporate activities and whose boards must consider the impact of their business decisions on their employees, their suppliers, the environment, and the community at large.  A social purpose corporation must similarly be organized to promote positive effects (or minimize negative effects) on the corporation’s employees, suppliers, or customers; the broader community; or the environment and is permitted, but not required, to state a specific social purpose for which it is organized.  In contrast, the flexible purpose corporation requires the entity to pursue a stated specific public benefit.  In making a determination regarding the legal form of an entity, the most important thing to bear in mind is that form should always follow function.

We have started to see, and will continue to see, shifts in the landscapes of the nonprofit and for-profit sectors due to the increased momentum of the social enterprise movement.  As nonprofit organizations navigate the social enterprise space and as the regulatory environment continues to change, it is particularly important that organizations carefully ensure compliance with applicable laws and statutes and that their boards of directors make informed decisions throughout the process.

Are you considering a social enterprise venture?

Gene Takagi, managing attorney of the NEO Law Group, will be presenting a session on social enterprises at BLF 2013.


Business as Unusual

The “Complete Capital” Approach to Board Engagement

The “Complete Capital” Approach to Board Engagement

By Angela Francis, manager, Nonprofit Finance Fund

The eleventh in our series of blog posts written by BLF 2013 speakers/presenters/sponsors.

Every year, Nonprofit Finance Fund (NFF) conducts a survey of the nonprofit sector that provides key data on issues like the rising demand for services, shrinking government support, and the precarious financial health of nonprofit organizations. This post explores what these survey results tell us about nonprofit board engagement in tough times.

Since 2009, our survey has asked nonprofit leaders to indicate what management actions they are taking to cope with the recession. In both 2009, 60 percent of nonprofit leaders told us that they were “engaging more closely with the board” by sharing new reports, increasing the number of annual meetings, or stepping up fundraising expectations. But that trend has been steadily declining since then:

Percentage of Respondents Engaging More Closely with the Board, 2009 – 2013

Percentage of Respondents Engaging More Closely with the Board, 2009 - 2013*Note that 2013 represents actions planned, while all other years are reported actions taken.

We were surprised this year when only 41 percent of respondents told us that they planned to work more closely with the board. On the one hand, it is possible that organizations are tapped out. There are certainly very real limits to the time and resources that a volunteer board can give. We’re definitely not encouraging meetings for the sake of meetings, and, at a certain point, it becomes impossible for nonprofits to simply engage “more” with their boards. It’s also possible that nonprofit leaders have become accustomed to operating within the ‘New Normal.’ Perhaps funding uncertainty has just become business as usual, no longer so urgent that it requires additional board meetings. It’s also likely that we’ve all gotten a little better at planning, managing, and expecting the unexpected.

But, unfortunately, the systemic resource challenges facing our sector will not go away just because we’ve gotten better at internally managing them. The big picture takeaway from our 2013 survey results is stark: For a fifth straight year, demand for service continued to rise while funding support is shrinking, or remains unpredictable, at best. It’s beginning to seem like something has to give; business as usual is no longer good enough. At NFF, we’re increasingly witnessing the clear and present need to think differently about the ways that we manage nonprofit organizations.

So what does that mean for an organization’s board? In 2012, we asked survey questions to uncover how nonprofits were working with their boards. The following chart shows the collective response from 3,915 nonprofit managers.

Our board serves as a resource in the following ways:

Our board serves as a resource in the following ways

Most nonprofit managers said that the board was underperforming when it came to fundraising. According to our sampling, 34 percent of nonprofit boards made the “right amount” of donations and a mere 24 percent were willing to leverage their relationships to directly solicit funds for the organization. Only 34 percent of boards were contributing “indirectly” to fundraising efforts through referrals or advice!

The current fundraising environment means that everyone needs to step up their game. But not all board members are recruited for their Rolodex or their wallet, and financial capital is only one type of resource. In order to remain relevant, develop innovative solutions, and meet the increasing demand for their services, nonprofits will also require social, intellectual, and human capital. Solving major societal challenges will only be possible with the right collaborations, partnerships, sector knowledge and new ideas—all things that the board can actively fuel and support. Think beyond the wallet, back to the moment that each member was recruited or voted on to the board: What motivated them to volunteer their time? What made them such a good fit? The answers to these questions can help identify hidden resources that board members can bring to bear on an organization’s most pressing concerns.

To truly go beyond business as usual, the board should think about its fiduciary responsibility as more than fundraising and making budget. The solution is not just “more” board engagement. Rather, the solution lies with board members who can creatively bring a range of available resources to help their organization achieve its mission.

If this topic is of interest to your organization, please join David Greco, vice president at Nonprofit Finance Fund, for his BLF session, Business as Unusual: Adapting the Nonprofit Enterprise.

Editor’s Note: A version of this post originally appeared at the ASU Lodestar Center blog as part of its Research Friday series.

The Working Board: Our Forgotten Stepchild

photo (4)By Bridget Clark Whitney, executive director, Kids’ Food Basket, and Matthew Downey, program director, Nonprofit Services, Johnson Center for Philanthropy, Grand Valley State University

The tenth in our series of blog posts written by BLF 2013 speakers/presenters/sponsors.   

Small nonprofits offer some of the most cost-effective solutions for addressing our society’s most critical issues. The passion, drive, and tenacity that fuel their work provide vital opportunities for resource-starved communities that struggle to leverage the resources they need to meet even the most basic of needs. In an era when philanthropy is constantly changing its priorities and the government shifts resources away from social services, small nonprofits are more critical than ever to the people and communities they serve. Since the board members of these organizations not only provide oversight and planning, but also execution, they deserve legitimate attention, tools, and support.

Here are some nonprofit realities to consider:

  • The nonprofit sector largely comprises very small organizations with limited resources for staff, if any at all. Roughly 86 percent of all public charities earn annual revenues of $499,999 and less (National Center for Charitable Statistics, 2013).
  • The majority of these organizations will likely always remain small, but will continue to provide meaningful programming to the individuals and communities they serve.
  • When working boards cultivate a culture of learning, strategic planning, active engagement, and staff partnerships, they will be more prepared to manage either growth or crisis.
  • The term “working board” is an informal term that has emerged to describe a governance setting where board members perform not only their fiduciary and strategic duties, but also partner with staff to fulfill management and technical functions.
  • Despite the fact that the majority of nonprofits have a working board, the sector has paid little attention to how they operate. Few resources exist that help small nonprofit organizations understand how to manage the complicated array of roles their board members assume.
  • Organizations with working boards are often encouraged by literature and consultants to transition into a structure with clearer delineation between staff and board roles even though they may never achieve the needed sustainable revenue streams to successfully do so.

Our perspective is that the working board is not a less sophisticated approach to governance structure. Rather, a working board requires a more thoughtfully constructed structure that relies upon diligent consistency in its implementation while maintaining entrepreneurial flexibility and responsiveness as the organization grows and/or adapts to its changing environment.

Nonprofit organizations with small budgets are naturally complicated. They often have big visions and lots of passion, but lack the financial resources they need to achieve all that they set out to do. Yet, despite this key challenge, so many are still able to put forth programming that is meaningful, impactful, and, at times, lifesaving for the people and communities they serve. Faced with the challenge of accomplishing so much with so little, the board and staff members of these organizations naturally seek clear guidelines and strategies for how they can manage their resources in the most effective manner.

At the BLF conference, in our session, “Making the Working Board Work,” we will explore this topic in depth by offering an official definition of the working board along with a model that can be used as a tool to help small nonprofits understand and manage the dynamic interplay between staff and board functions. We will tell the story of Kids’ Food Basket, a Michigan nonprofit organization that successfully grew from a $3,000 grassroots operation to a $4.1 million enterprise that now provides evening meals to roughly 5,500 food insecure children each weekday.

This dynamic and lively session applies both theory and practice in an effort to provide a strategic framework specifically designed for the small nonprofit’s context. We will provide practical tools, thoughtful insights, and lessons learned that can be applied in most nonprofit settings, but are specifically geared to organizations with small budgets. Some of the specific tools and insights we will address include board/staff relationships, adaptive capacity, strategic decision-making, succession planning and transition preparation, committee management and more. The Kids’ Food Basket story will offer a real life context to these concepts. It demonstrates that when managed effectively, small nonprofits can prosper.

What lessons has your working board learned?




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